Magazine

Online Extra: Heineken: Growth -- "But Not at Any Price"

September 07, 2003

Heineken (HINKY) is the world's third-largest brewer, and its flagship beer brand enjoys worldwide recognition. Yet since the death last year of Alfred "Freddy" Heineken, grandson of the company founder and architect of its global growth strategy, the Amsterdam-based brewer has faced a raft of new challenges: Falling beer sales in key markets, unfavorable currency movements, and rampant consolidation that has created aggressive new competitors such as SABMiller (SBMRY). Heineken has responded by ramping up acquisitions, streamlining its international operations, and tightening its marketing and advertising. It believes it can continue to grow, as beer drinkers around the world trade up to premium lagers.

Q: You issued a profit warning on June 23, saying that after years of double-digit growth, profit is likely to be flat in the first half of 2003. What are you doing to get business back on track?

A: We didn't issue a profit warning. What we did is tell the world that volumes were not growing as fast as we said in earlier statements. We were aware that it would be perceived as a profit warning. Volume is, of course, quite important, but it had nothing to do as yet with a profit warning.

The reasons were very varied -- because of the dollar, because of SARS in the Far East, because of the weather in the Northeast U.S. market -- share-wise, we didn't see any reason to become worried. For the time being, we say: Yes, there are reasons why volumes aren't up where we want to have them, but this isn't a reason to change our strategy. The strategy is right, but we could sharpen up. And that's what we're doing.

Q: Has the market changed in a fundamental way?

A: It's too early to say. There are too many [unusual factors]. For example, SARS in the Far East. Nobody wanted to go to a nightclub or caf? to have a good time. We didn't export for six weeks to Hong Kong. That was a real blow, but it's coming back.

Q: The beer industry has seen a lot of merger activity in the last year, including your acquisition of BBAG in Austria as well as assets in Egypt and other countries. Will there be a pause now?

A: We're interested in growing -- but not at any price. We're interested in making fundamental progress building on the strengths we have. This year, we've been seeing opportunities to add whole regions. You have to be prepared to pay a price for that. BBAG was on the wish list of Heineken management for as long as I know. BBAG are good brewers, and they know the region like nobody else.

Q: Some analysts have said the $2.1 billion price is too high.

A: It was an auction. Not only was the competition high, but also the synergies were high. [SABMiller] has large interests [in Eastern Europe] and so does Interbrew, and they're not known to be easy, sleepy kinds of competitors. I respect them an awful lot. But this time it worked out in our favor.

Q: How long will it take to make a return with BBAG?

A: Something like seven or eight years, which for an acquisition of that nature is not bad at all. Because of our strength in Eastern Europe, there are very few remaining breweries in Europe that would be possible for us to buy.

Q: How confident are you about market share in the U.S.? Some analysts worry that on-premise sales are weaker than the numbers indicate.

A: You have to measure indirectly because you have no direct [measurement of on-premise] sales. Our information lines through wholesalers are improving all the time. There's nobody who has told me that in market share we're doing worse than the competition.

Q: How big a problem is the weakness of the dollar?

A: We're protected for 2003 90% to 95% [through hedging]. This year it's going to cost us at the net-profit level something like 35 million euros [$40 million]. If it continues at this level, assuming nothing else changes, it could cost us 80 to 90 million [euros, or $90 million to $102 million] in net profit next year. That, of course, is a big negative.

Q: Anheuser-Busch (BUD) has started selling a premium-priced beer in the U.S. called World Select that comes in a green bottle. That's obviously aimed at Heineken. How worried are you about that?

A: For the time being, I consider it a compliment. It doesn't mean we're not following it very closely. We'll see what consumers think about it, and then see what can be done that needs to be done. U.S. consumers want the real thing. I consider Heineken to be the real thing.

Q: You're relaunching in Britain, withdrawing the weaker Heineken that was sold for years and introducing the stronger beer brewed in Amsterdam, which is the Heineken familiar to Americans. How's that going?

A: It's going according to plan. In [retail] trade, there's a furious battle going on. That doesn't worry me a bit. We want to have a premium positioning in Britain. It will be a long-term commitment. Getting the positioning right is for me a much bigger concern than the volume.

Q: The demographics are not working in your favor in Europe. Beer consumption is declining.

A: So far, that has not hampered us in our premium-segment development. We're so strong in Eastern Europe -- that's where the market is still growing -- and the affluence of the people as they enter the European Union should also be an improving factor. In that part of Europe, I still see lots of opportunities for further growth.

Q: Has Heineken changed since Freddy Heineken died?

A: Not really. He was a fantastic symbol. We have every intention of keeping it that way. His daughter and her family have demonstrated over the past 12 months that they're equally committed and equally supportive, even when it comes to making a big acquisition like we did. Of course, what you miss is his [gut] feeling. He was so long in the business, [the benefit of] his experience is perhaps less present.

Q: How hands-on is the Heineken family? Charlene de Carvalho-Heineken has replaced her late father as the controlling shareholder, and her husband Michel is on the Heineken supervisory board.

A: Not hands-on, but, of course, they like to remain in touch. They're interested in everything that has to do with their name, the Heineken name, the heritage of Freddy. They may have their opinions about certain countries because they go there or certain products because they see them, but that's all on an informal and, I must say, very pleasant basis.

Q: There's a perception among analysts that because Michel de Carvalho is an investment banker, that has given you more freedom to do big deals and be more aggressive.

A: He's not the only banker. There's collective decision-making. The support of the family is very important to us, but it's not because of his banker's background but simply because he has been supportive altogether.